Aviva 2006 Annual Report Download - page 112

Aviva plc
Annual Report and Accounts 2006 108
Accounting policies continued
(L) Reinsurance
The Group assumes and cedes reinsurance in the normal course of
business, with retention limits varying by line of business. Premiums
on reinsurance assumed are recognised as revenue in the same
manner as they would be if the reinsurance were considered direct
business, taking into account the product classification of the
reinsured business. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsured
policies, using assumptions consistent with those used to account
for these policies.
Gains or losses on buying retroactive reinsurance are recognised in
the income statement immediately at the date of purchase and
are not amortised. Premiums ceded and claims reimbursed are
presented on a gross basis in the consolidated income statement
and balance sheet as appropriate.
Reinsurance assets primarily include balances due from both
insurance and reinsurance companies for ceded insurance liabilities.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the outstanding claims provisions or settled claims
associated with the reinsured policies and in accordance with the
relevant reinsurance contract.
Reinsurance contracts that principally transfer financial risk are
accounted for directly through the balance sheet and are not
included in reinsurance assets or liabilities. A deposit asset or liability
is recognised, based on the consideration paid or received less any
explicitly identified premiums or fees to be retained by the reinsured.
If a reinsurance asset is impaired, the Group reduces the carrying
amount accordingly and recognises that impairment loss in the
income statement. A reinsurance asset is impaired if there is
objective evidence, as a result of an event that occurred after initial
recognition of the reinsurance asset, that the Group may not
receive all amounts due to it under the terms of the contract, and
the event has a reliably measurable impact on the amounts that the
Group will receive from the reinsurer.
(M) Goodwill, AVIF and intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over
the fair value of the Group’s share of the net assets of the acquired
subsidiary, associate or joint venture at the date of acquisition.
Goodwill on acquisitions prior to 1 January 2004 (the date of
transition to IFRS) is carried at its book value (original cost less
cumulative amortisation) on that date, less any impairment
subsequently incurred. Goodwill arising before 1 January 1998
was eliminated against reserves and has not been reinstated.
Goodwill arising on the Group’s investments in associates and
joint ventures since that date is included within the carrying value
of these investments.
Acquired value of in-force business (AVIF)
The present value of future profits on a portfolio of long-term
insurance and investment contracts, acquired either directly or
through the purchase of a subsidiary, is recognised as an asset.
In most cases, this is classified as AVIF but, for non-participating
investment contracts, it is included within intangibles. If this results
from the acquisition of an investment in an associate, the AVIF is
held within the carrying amount of that associate. In all cases, the
AVIF is amortised over the useful lifetime of the related contracts
in the portfolio on a systematic basis. The rate of amortisation is
chosen by considering the profile of the additional value of in-force
business acquired and the expected depletion in its value. The value
of the acquired in-force long-term business is reviewed annually
for any impairment in value and any reductions are charged as
expenses in the income statement.
The full embedded value of the long-term business and further
details of the methodology and assumptions are included as
supplementary information on pages 220 to 243.
Intangible assets
Intangibles consist primarily of brands, certain of which have
been assessed as having indefinite useful lives, and contractual
relationships such as access to distribution networks and customer
lists. The economic lives of the latter are determined by considering
relevant factors such as usage of the asset, typical product life
cycles, potential obsolescence, maintenance costs, the stability of
the industry, competitive position, and the period of control over
the assets. These intangibles are amortised over their useful lives,
which range from five to 22 years, using the straight-line method.
The amortisation charge for the year is included in the income
statement under “Other operating expenses”.
Impairment testing
For impairment testing, goodwill and intangibles with indefinite
useful lives have been allocated to cash-generating units by
geographical reporting unit and business segment. The carrying
amount of goodwill and intangible assets with indefinite useful
lives is reviewed at least annually or when circumstances or events
indicate there may be uncertainty over this value. Goodwill and
indefinite life intangibles are written down for impairment where
the recoverable amount is insufficient to support its carrying value.
Further details on goodwill allocation and impairment testing are
given in note 15(b).
(N) Property and equipment
Owner-occupied properties arecarried at their revalued amounts,
which are supported by market evidence, and movements are
taken to a separate reserve within equity. When such properties are
sold, the accumulated revaluation surpluses aretransferred from
this reserve to retained earnings. All other items classed as property
and equipment within the balance sheet are carried at historical
cost less accumulated depreciation.
Investment properties under construction are included within
property and equipment until completion, and are stated at cost
less any provision for impairment in their values.
Land is not depreciated. Depreciation is calculated on the straight-
line method to write down the cost of other assets to their residual
values over their estimated useful lives as follows:
–Properties under construction No depreciation
–Motor vehicles Three years, or lease term if longer
–Computer equipment Three to five years
–Other assets Three to five years
Where the carrying amount of an asset is greater than its
estimated recoverable amount, it is written down immediately to its
recoverable amount. Gains and losses on disposal of property and
equipment are determined by reference to their carrying amount.
Financial statements continued